2nd position in gap lending, first time investor need help

[Diane Albano]

I did a gap loan to a wholesaler who has a few projects going on. This is my first time investing. I received a promissory note/ operating agreement. He promises to pay principal and interest at a yearly rate of 12 %. I loaned them 35K. This is my concern, never took this operating agreement /promissory note to a lawyer to review. BIG MISTAKE. I was given no other paper work. (what paper work should I have been requesting)? I drove down to this property which is in a high crime area, not only high crime but serious crimes. The Rehabber did the bear minimum to fix this house. He signed an exclusive with a Realtor and they showed the house a few times but people can't apply for FHA Loan because there is a Gas Station across the street from the house. My question is when being in 2nd position which now I understand is very risky what paper work should I have been given? Can I be put on the deed as second lien holder?

Shouldn't I have been told who hard money lender is? closing cost? etc. I don't know how much ARV is, the first contractor was fired for doing terrible work, a second contractor was hired to finish the job. what is the proper protocol in this situation. I need an attorney I am looking for one. House is located East Orange NJ, Now they are lowing the price of the house 5K . If anyone can suggest to me or help me please I am pacing the floors.

[Jeff S.]

First, @Diane Albano, take a breath and stop pacing. You gave no indication in your post that there is any reason to believe you will not be paid back or that you would lose any money on this deal. Lowering the sale price of a property happens all the time and provides no reason to fear you will not be made whole. All it means is that your borrower will make less money on the sale.

That’s the good news. The bad news is that if all you were given is a note and an operating agreement, then you are not in second position but are completely unsecured. An operating agreement is not a lien against the property. You would need a mortgage, recorded in the county of the property, to enforce any claim or to foreclose. Are you sure this is not what you were given? If so, you could bring it to the county recorder’s office (or whatever it’s called in your state) and record it yourself. Here, you would be behind any other recorded mortgages, but that’s better than nothing.

It makes my blood boil when I read some of the inane posts here requesting info on how to put unknowing individuals into 2nd positions loans for their flips when neither knows absolutely anything about lending, or the associated risks. Hopefully, your borrower has at least some integrity and a knowledge about flipping. Your loan seems to have been handled so poorly, I imagine your lawyer will be discussing fraud if it comes down to it. Do you know of others who invested with your borrower?

Though it’s way too late for you, to answer your main question, this thread contains a list of most, but not all of the documents you should require: Private Lender - Forms Required??  Your state could have special requirements as well.

You shouldn’t get these documents from a title company. Title companies are not lenders and they are certainly not your lawyer. Nor do you get them from a real estate attorney, the majority of which are only experienced at closing conventional loans. Private lending documents, and an explanation of the processes, should come from either a lending and securities attorney or a hard money lender who obtained them from one.

In fact, you ought to have a large hard money lender originate your loans for you. Some will do this, and some won't. HML's are used to dealing with private loans and will provide an evaluation of the property, the borrower, and perhaps even you to establish suitability. They will also have vetted paperwork, proper licensing, and understand the processes to legally originate your loans. You must also do your own evaluation of the property and also check the borrower out thoroughly yourself.

Please let us know how this goes, Diane. I’m not as concerned as you, but I am concerned.

Jeff S. – Private Lender from Los Angeles